5 Long-Term Consequences Of The Recession

Whenever the word “recession” comes up, people expect a certain amount of damage, and damage of a certain type. Everybody knows that there will be job losses and a general sense of gloom and malaise. Most people also seem to expect the government to “ do something” to end the recession. Along the way, the stock market falls, interest rates drop and overall economic activity slows down. It is never pleasant, but it is a relatively routine part of the economic cycle.

The Great Recession that officially ended a year ago may be different with consequences that could run deep and last for many years. (It’s not all bad. Check out The Bright Side Of The Credit Crisis.)

“I Love You, But …”This recession seems to be having a definite impact on family life. Industrial production is not the only “production” that has fallen; birth rates have dropped to record lows as people delay having children in the face of the economic troubles. What’s more, there is the expected increase in divorces – not surprising, given that monetary issues are a common root cause of divorce and tough economic times sharpen those problems – as well as a big spike in prenup agreements.

Losing the FutureOne of the saddest under-reported consequences of recession is the different impacts it can have on young people. Grim as it is, recessions lead to higher rates of child malnutrition, and there is ample evidence that points to serious long-term consequences to such malnutrition, including stunted development and academic under-achievement.Even for kids who have enough to eat, the impacts can still be serious. Less money in the pockets of parents can have a direct impact on the kids’ education and enrichment opportunities. Too many high school kids are finding college slipping out of reach due to a combination of parents who cannot help with tuition and banks that will not lend. What’s more, it is fair to wonder what the psychological impact may be of seeing mom and/or dad lose a job and be out of work for years – does it inspire unproductive emotions like resentment or fatalism? (For more, see The 6 Worst Student Loan Mistakes You Can Make.)

More Anger, More DistrustRecessions have a way of stapling a “kick me” sign to the back of whatever government is in charge during the troubles. This recession feels a bit different though, as almost everybody seems angry about something. One side of the aisle is livid at what they see as untrammeled expansion and intrusion of government; the other side chastises the government for not getting involved enough and solving the problem!With a festering pit of rancor to exploit, some politicians are apparently looking to score points with constituents by stirring the pot instead of working with their colleagues to create long-term solutions for national policy. In turn, that may mean that this recession has the long-term side effect of distracting the political process and creating so many bad feelings that important work goes undone and problems become even more serious down the line.

A New World of Jobs and HousingIt seems likely that this recession will have a long tail in terms of its impact on jobs and housing. Individuals who thought their portfolio and/or the value of their house meant that retirement was imminent may now be facing a decade or more of additional working years. That could be bad on several levels, as it will block new entrants from the job market and will mean higher employment costs for companies. Ironically, the government may stand to benefit, as it could increase the spread of time where these workers contribute to the Social Security system before taking benefits.It is not unusual for housing prices to decline in a recession, but the role of housing in this Great Recession is clearly a little different than past examples. With so many people trapped in unsellable houses, the normal migration from areas with no jobs to areas with jobs has been stymied. Moreover, so many people have learned a harsh lesson regarding the fallacy of houses making great investments.What could this mean for the future? It is not unthinkable that politicians may reconsider whether it really is good to aggressively promote home ownership and whether Congress ought to roll back certain incentives. It may also be the case that former homeowners either decide that the hassles of home ownership are not worth the risks, or that they cannot get mortgages again in the future. In either case, houses may lose their luster and the recovery in housing prices could turn into a multi-decade slog. (For more, see Boomers: Twisting The Retirement Mindset.)

Huge Debts to PayIn an ironic twist, a recession that came about in large part because of excessive consumer debt and excessive financial leverage in the system may yet end with far too much debt on balance sheets. As the Fed has determinedly pushed rates down to near-nothing, corporations (and the federal government) have gorged on the cheap paper.Savvy companies will no doubt put this capital to work and make substantial returns on the leverage. The problem is, it is never the savvy companies that cause reason to worry. It’s the “me too” companies led by reckless or inept managers who will cause the trouble. Sooner or later, these companies will have a tough time paying their debts, and that will lead to a whole new cycle of worry, distress, job loss and so on. Likewise, without a buoyant economy to bail out the federal government, this high public debt burden could lead the way to higher taxes, higher inflation and other unpleasant consequences.

Prudence, Not Fear, Pays OffThere will always be reasons to be concerned about the future, but investors should guard against despair and unproductive fear. True, this recession may prove to have some long-term consequences that are not fully appreciated today. That does not make them insolvable, however. The best option for investors is to stay as informed as possible, stay diversified and be opportunistic when new ideas show up. (For more, see 5 Lessons From The Recession.)

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